eKTP 112

Earning Stripping Rules
Part 2 of 2 


Earnings stripping rules to replace the proposed thin capitalization rules

Thin capitalization provisions were supposed to have been introduced into the Income Tax Act (ITA) with effect from 1 January 2009 but was deferred up to 31st December 2017.

However, the Thin Capitalization rules was never implemented in Malaysia.   With effect from 1 January 2018, it is proposed that Earning Stripping Rules (“ESR”) be implemented with the introduction of Section 140C.

Earning Stripping Rules - (ESR)

The rules will apply to business source income only, ESR is applicable to cross-border related party financial assistance only.  Under ESR, the interest deduction will be limited to a fix ratio at between 10% -30% (to be determined by IRB) of the company's profit before Interest, Tax, Depreciation and Amortization (“Tax-EBITDA”).

Tax – EBITDA is computed as follows:

Tax – EBITDA = Adjusted Business Income + Qualifying Deductions (e.g., double deduction) + Interest Expenses claimed in business Income.;

Interest in excess of the prescribed ratio will not be deductible in the year it is incurred.

The proposed de minimis threshold is RM 500,000 (it remains to be seen whether the suggested threshold of RM 500,000 will be applied,)

Some entities such as financial institutions and Labuan entities may be excluded from the rules;
The types of interest expense under ESR would include interest on all forms of debts.

It would also include other financial payments that are economically equivalent to interest, but would not include expenses incurred in connection with the cost of raising of finance.